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  • Alex Pettee, CFA

Recession Risk • Yields Retreat • Inflation Data Ahead

  • U.S. equity markets were little-changed Wednesday while benchmark yields retreated ahead of key economic reports on Thursday including the PCE Index - the Fed's most commonly-cited inflation metric.

  • Pushing its week-to-date declines to about 2.5%, the S&P 500 finished lower by 0.1% today but the tech-heavy Nasdaq 100 finished slightly higher. Mid-Caps and Small-Caps each declined about 1%.

  • Real estate equities were laggards today as the rough week for technology REITs continued. The Equity REIT Index declined by 0.6% today with 18-of-19 property sectors in negative-territory.

  • Benchmark interest rates retreated following comments by Fed Chair Powell, who double-down on the hawkish position that the Fed must accept the risk of recession, as the "bigger mistake" would be "failing to restore price stability."

  • Gaming and Leisure Properties (GLPI) finished lower by about 1% today after announcing yesterday afternoon a $1.0 billion deal to acquire two Bally’s casino properties and launching a secondary stock offering to fund the acquisition.

Income Builder Daily Recap

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U.S. equity markets were little-changed Wednesday while benchmark yields retreated ahead of key economic reports on Thursday including the PCE Index - the Fed's most closely-watched inflation metric. Pushing its week-to-date declines to about 2.5%, the S&P 500 finished lower by 0.1% today but the tech-heavy Nasdaq 100 finished slightly higher. The Mid-Cap 400 and Small-Cap 600 each declined by about 1%. Real estate equities were laggards today as the rough week for technology REITs continued. The Equity REIT Index declined by 0.6% today with 18 of the 19 property sectors in negative territory while Mortgage REIT Index slipped 1.6%.

Benchmark interest rates retreated following comments by Fed Chair Powell, who double-down on the hawkish position that the Fed must accept the risk of recession, as the "bigger mistake" would be "failing to restore price stability." The benchmark 10 Year Treasury Yield declined 11 basis points to close at 3.09% - near its lowest level in three weeks and well below its recent highs of 3.50%. The Energy (XLE) sector was a notable laggard today as Crude Oil and Gasoline prices retreated following a larger-than-expected inventory build in the weekly EIA data. Five of the eleven GICS equity sectors finished higher on the day, however, led to the upside by the Healthcare (XLV) and Consumer Staples (XLP) sectors while the Home Improvement segment of the Hoya Capital Housing Index also posted strong performance.

Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector

Casino: Gaming and Leisure Properties (GLPI) finished lower by about 1% today after announcing yesterday afternoon that it reached a $1.0 billion deal with Bally’s Corporation (BALY) to acquire the real property assets of Bally’s two Rhode Island casino properties – Bally’s Twin River Lincoln Casino Resort (“Lincoln”) and Bally’s Tiverton Casino & Hotel. Bally’s will immediately lease back both properties and continue to own, control, and manage all the gaming operations of the facilities on an uninterrupted basis. GLPI expects the transaction to be accretive to earnings upon closing in late 2022 and launched a secondary offering to sell 6.9M shares of common stock for total gross proceeds of ~$308.8 million to fund much of the acquisition. Both properties are expected to be added to the existing Bally’s Master Lease between GLPI and Bally’s, with incremental rent of $76.3 million.

Manufactured Housing: Today, we published Manufactured Housing: Recession Resistant REITs. Manufactured Housing REITs - one of the most "recession-resistant" property sectors given their countercyclical demand profile- have rebounded over the past month following uncharacteristic underperformance in early 2022. MH REITs have remarkably delivered nine consecutive years of outperformance compared to the broader REIT Index, benefiting from strong operational execution, significant supply constraints, demographic tailwinds, and high barriers to entry. While MH REITs have historically been among the most rate-sensitive sectors due to their remarkable consistency in delivering steady 3-4% rent growth, we believe their inflation-hedging potential is underappreciated.

Hotel: This evening, we'll publish an updated report on the Hotel REIT sector to the Income Builder marketplace. Despite depression-like levels of consumer confidence and surging transportation costs, U.S. consumers have continued to travel this summer at levels that are within shouting distance of pre-pandemic rates. In the latest report from STR, U.S. hotel revenue per available room (RevPAR) reached an all-time weekly high on a nominal basis and a pandemic-era high on an inflation-adjusted basis for the week ending June 18th. While occupancy rates are still about 5% below 2019-levels, average room rates are higher by nearly 15% on average, driving a 9.4% increase in comparable RevPAR. Skepticism over the sustainability of this momentum, however, has pushed hotel REITs lower by nearly 20% over the past month. In the report, we'll discuss our updated outlook and recent allocations.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs were broadly lower today with residential mREITs slipping 1.7% while commercial mREITs declined 2.7%. On a quiet day of newsflow, notable laggards today included Apollo Commercial (ARI) and Annaly Capital (NLY) while upside standouts included Invesco Mortgage (IVR), which continued its strong week after providing a business update on Tuesday.\

REIT Preferreds & Capital Raising

Per the Income Builder Preferred Tracker available to Income Builder subscribers, REIT Preferred stocks finished lower by 0.36% today, on average. REIT Preferreds are lower by roughly 13% on a total return basis this year after ending 2021 with price returns of roughly 8.0% and total returns of roughly 14%. There are now roughly 180 REIT-issued exchange-listed preferred and debt securities with an average current yield of 7.06%.

Economic Data This Week

The most closely-watched report of the week will be PCE Price Index on Thursday which investors - and the Fed - are hoping will finally show some signs of moderating price pressures. We'll also be watching Construction Spending on Friday and a flurry of Purchasing Managers' Index ("PMI") data and consumer sentiment surveys throughout the week.

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Disclosure: Hoya Capital Real Estate advises two Exchange-Traded Funds listed on the NYSE. In addition to any long positions listed below, Hoya Capital is long all components in the Hoya Capital Housing 100 Index and in the Hoya Capital High Dividend Yield Index. Index definitions and a complete list of holdings are available on our website.

Additional Disclosure: It is not possible to invest directly in an index. Index performance cited in this commentary does not reflect the performance of any fund or other account managed or serviced by Hoya Capital Real Estate. Data quoted represents past performance, which is no guarantee of future results. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy.